The interactions between the Fair Work Act 2009 (Cth) (Fair Work Act), the relevant Awards, enterprise agreements and individual employment contracts are complex. The difficulty employers face in compliance is demonstrated by the constant stream of compliance ‘scandals’ that have bombarded the media in relation to significant underpayment of employees.

The type of issues that are found to be at the root of these compliance ‘scandals’ are often common across employers. They include the misclassification of employees under the relevant Modern Award, not effectively setting off over award payments and poor record keeping. Even a relatively small payroll error, when accumulated over several years across many employees, can result in a large problem for employers.

Not keeping up to date

Employment law is an area of constant scrutiny and is always changing. Even issues that were considered to be well settled can be reviewed and interpreted differently.

For example, in  the recent decision of Mondelez v AMWU & Ors [2019] FCAFC 138, the Full Federal Court decided that employees are entitled to 10 “working days” of paid personal leave, including part-time employees. A “working day” constitutes the hours the employee would have worked in a 24-hour period. Employers need to review their payroll systems and the accrual of personal leave, including for part time employees. You can read further about this decision in our recent article, here

Employers need to be regularly reviewing their payroll, in order to ensure that they remain compliant with the changes.

Not effectively “setting off” over award payments

Employers will often pay employees a flat rate above the minimum award rate, which is intended to compensate the employee for all award entitlements in relation to their work, such as minimum wages, overtime, penalty rates and leave loading.

The ‘Absorption Clause’ which has appeared as standard clause 2.2 in most modern awards since January 2010, has allowed employers to offset over award entitlements, effectively allowing them to fulfil their obligations under the award when paying an above award flat rate. This has meant employers could defend against claims for additional modern award entitlements (including overtime, penalty rates and allowances) by proving the over award payments made to employees met or exceed the modern award obligations.

The Full Bench of the Fair Work Commission, in its four yearly review of modern awards, has decided that the Absorption Clause will be removed from modern awards. As an employer you will still have the ability to use an offsetting arrangement if paying over the minimum award rates, however, to meet the common law principles of set off, you will need to document those arrangements through a well drafted offset clause in an employment contract. The common law principles do not allow an employer to meet its obligations by offsetting award entitlements against over award payments, unless there is a specific agreement with the employee reflecting this arrangement.

If the payment arrangement is not clearly documented, you will not be able to lawfully offset and will be at risk of underpayment claims and prosecution by the Fair Work Ombudsman for non-compliance with the award.  

A new employment contract (or an addendum to an existing employment contract) can be implemented to include an offset clause amongst other relevant alterations which may need to be made.

Incorrectly classifying employees under the wrong Award or classification

Whether an employee is covered by a modern award will depend on whether their job involves performing the duties and responsibilities set out in the classifications section of any particular modern award and/or if the business operates in an industry covered by a modern award.

A common mistake that employers make is classifying all of their employees under the same award, when it is not unusual for an employer to have employees classified under multiple awards. It is essential for employers to consider each employee individually (or category of employee if sufficiently similar) to determine which modern award applies to the employee.

Further, it is important to ensure the individual employee is classified correctly under the modern award. This also needs to be reviewed as the employee gains more experience, as they may move through the classifications.

Lack of payroll reviews and poor record keeping

Identification of underpayments and associated record keeping obligations is a key focus if the Fair Work Ombudsman (FWO) decides to audit your business. If the FWO suspects there has been a contravention of workplace laws, they have the power to inspect employment records.

Surprise audits of 17 Top Juice outlets have been carried out by the FWO in Victoria, New South Wales, Queensland and the ACT to check compliance with Australia’s workplace laws. This was in response to anonymous reports and requests for assistance from Top Juice employees. Fair Work Inspectors were at the stores, reviewing employment records and speaking with Top Juice staff and management about employment entitlements and record keeping processes. 

With the FWO’s power to conduct random audits, it is wise to ensure you are aware of, and compliant with, your record-keeping obligations. This also assists in identifying errors before they compound into a much larger issue.

Employers need to make it a priority to review their pay structure and how it meets their obligations under the Fair Work Act, modern awards and enterprise agreements.  We also recommend a  review employment contracts to ensure you they are lawfully able to offset and not be at risk of underpayment claims and prosecution by the FWO for award non-compliance.

This article was co-written by Employment Lawyer, Emma Sheen.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  

Susan Moran

Susan Moran -

Principal

Litigation and dispute resolution specialist